We evaluate proposals for the reform of the U.S. system of taxing cross-border income including dividend exemption, full current inclusion, and a Japanese type version of dividend exemption with an effective tax rate test subject to an exception for an active business. In addition we consider a special version of a country by country minimum tax with dividend exemption, no active business exception, but a current deduction against the minimum tax base for real investment in the location. To compare these schemes with current law, we first reevaluate the burden of the dividend repatriation tax using evidence from the response to the 2005 repatriation tax holiday. We find that the implicit cost of avoiding repatriations is higher than found in previous estimates, particularly for high tech profitable foreign businesses, and rises as deferrals accumulate. We simulate the effect of the various alternatives on effective tax rates for investment in high and low tax countries with inclusion of the importance of parent developed intangibles and their role in shifting income from the United States. To highlight the effect of check-the-box, the simulations are provided for effective tax rates both before and after its introduction.

The analysis suggests that the minimum tax with expensing for real investment has many advantages compared to the other schemes. The minimum tax offsets the increased incentives for income shifting under pure dividend exemption and is better than full inclusion in tailoring companies’ effective tax rates to their competitive position abroad. No U.S. tax burden will fall on companies that earn just a normal return abroad. The minimum tax is basically a tax on large excess returns in low tax locations, cases in which the company probably has less intense foreign competition. Unlike the Japanese type dividend exemption alternative considered, there is no cliff in which the income is subject to the full home country rate if it fails the minimum tax and active business test. Under the minimum tax with no cliff the company has more of an incentive to lower foreign taxes and will often prefer paying the U.S. minimum tax to paying a higher foreign tax. Finally, the minimum tax with expensing seems more advantageous than the repeal of check-the-box. It is more effective in discouraging income shifting. In summary, the minimum tax with expensing combines the advantages of the extreme alternatives, dividend exemption and full inclusion, and reduces their shortcomings.